Break-even charts

Break-even charts

Break-even charts provide a simple (and relatively unsophisticated) method for determining the minimum level of sales that a company must achieve in order for the business to be profitable. Consider the simple relationship illustrated.Here total income has been plotted against total costs using the same scale for each axis.

At point A, total costs exceed total income and the operation is not profitable, that is, it makes a loss. If we charge more for the product, whilst keeping the costs fixed, we would move from point A to B. At a certain point, total income exceeds total costs and we move into profit. Finally, let us assume that our total costs increase whilst the total income from sales remains unchanged. We would then move from profit (point B) to loss (point C).

The break-even point is the volume of sales at which the operation becomes profitable and it marks the transition from loss into profit. A break-even chart takes the form of a graph of costs plotted against volume of product sold. At this point, it is important to recall that the total costs of the business operation are the sum of the constant fixed and overhead costs with the variable costs of production. Thus,

Total cost = Fixed cost + Overhead cost + Variable cost

The income derived from the sale of the product (assuming a constant pricing structure) will simply be the product of the quantity sold (i.e., the volume of product sold) and the price at which it is sold (i.e., the per unit selling price). This relationship (a straight line) can be superimposed on the break-even chart and the point of intersection with the total cost line can be identified. This is the break-even point and the corresponding production volume can be determined from the horizontal axis.